What are the current and potentially future roles of our Governments? What can they to, what should they do and how are these roles defined?
When looking at the changes taking place in the world and the interference with governments and their policies, we also need to understand the basic roles our governments have and what they can really achieve.
For most people, the government is only a vehicle where they pay taxes, and they choose who represents them in the political space. But in fact, a government can have a lot of different roles, and it is important to understand them and why we need to do better. Especially in a world where we face economic crisis, global warming, social inequality, and a rise of tech-giants, we need to understand better who our government is, what they can do, and where they especially at the moment lack.
7 roles of the Government
1. Providing public goods
Goods and services that are “non-excludable” and “non-rivaling”, for services where you can’t exclude anyone from using it or there is no trade-off if more participants are using it.
Examples: Public Defense might be the best example for highlighting the two concepts of non-excludable and non-rivaling goods. When a country protects its territory, then you cannot exclude a citizen living in this country from the service of this defense. It is also no different if another person joins the country as the whole region is protected, this extra citizen consumes the service, but it doesn’t rival other citizens, so they get all the same protection as before.
2. Managing Externalities
One of the most critical but also most discussed points is the management and interference with externalities. These externalities can be positive but also negative. Usually, the positive externalities are managed by state-owned companies or very regulated public/private companies. Most of the negative externalities are usually mitigated by using laws, restrictions, and the introduction of standards.
Problems with externalities can also involve a systematic “Market failure”. This occurs especially when individual incentives do not lead to rational outcomes for the group as a whole. These market failures often evolve to a certain point until the government intervenes and needs to regulate.
Examples: The most common fields where positive externalities are managed by governments are health care, education but also things like environmental protection. On the other side, there can be also negative externalities to manage. E.g. overfishing, global warming, and other fields where regulation needs to be found for the good of all people.
3. Government Spending
Governments can act as a leading driver for specific investments and even for industries. This only began recently in the middle of the twentieth century when government spending started to really pick up as a driver for the economy.
Examples: In recent years we have seen massive investment in new technologies. Germany is for example financing €10bn for start-up investing to help late state startups expand their business. They hope that this governmental incentive leads to a growing business, more employment but also €20bn co-investment from private investors which will be attracted by the governments’ support.
4. Distribution of Income
One of the most pressing and most enduring issues in the political field. It involves regulating the market, securing minimum incomes, providing more “equality” but also ensuring that the incomes are distributed as near as possible. This also means taking from the rich and distributing it to the poor.
Example: Income Tax might the best-known measure to ensure more equality. While in most countries the government taxes lower incomes little to almost nothing, it is usually that the rich pay a higher share of their income.
5. Federal Budget
Taking care of the deficit and also controlling the governments’ expenditures and incomes, is a major role for governments. Incomes are most commonly derived from taxes and fees while expenditures are mostly on topics like education, social security, public defense, and administration costs.
Example: Most countries have a budget they negotiate every legislation period. In this budget they outline their goal for the deficit, the investments they intend to make and the savings they plan to implement.
All roles of the governments need funding and also redistribution. No matter if providing public goods like education, spending on infrastructure, or distribution of income. All spending have to be “earned” somehow at a certain point in time. For a government, it is a key role to determine the taxation system and its effect on the economy, social equality but also other factors like competitiveness and more. Especially this role is one of the most discussed ones and leads also internationally to a lot of tensions when so-called “tax havens” appear.
Example: Income Tax, Property Tax, Corporate Income Tax, and many more taxes are used to give the state a share of the gained value which can be used to provide basic services but also distribute if there are inequalities.
7. Social Security
With growing concerns about modern colonialism and growing social inequality, the call for social security was never louder. Most of us know the social security only from our parents or grandparents who receive their pension from the state, so they don’t have to worry about working when they are old. This social security also extends in many countries to unemployment, in case of sickness or other forms of support in different situations. When looking at a digital world, also the basic-income is gaining momentum as a lot of people fear that the giant tech world leaves a lot of unemployed, letting them fear for their basic income.
Example: Pension and Disability Insurance are the two basic pillars of social security you find in almost every country around the world.
Changing government roles
As we see, the governments have a wide array of interests to take care of. Most problems also only can be addressed after they occur, especially since this is the case in managing externalities, social inequality, or market failures. The government only intervenes when there are structural problems occurring. This reactive stance of most governments is also causing a lot of troubles as the outcomes can be observed for a long time and most of the time governments only react when it is too late.
It might be time that governments get new roles.
- A role of helping citizens making better choices
- A role of social engineering
- A role to collaborate instead of politicizing
- A role of trying and failing
- A role to proactively preventing future known externalities
One of the examples for this kind of proactive government style can be found in Sweden, where insights into behavioral economics were used to newly design the social security system of Sweden, organ donation rules, and much more. This might be a key role in the future where we as a society need to be proactive in designing the future.
Maybe the fast pace of our time will also need a new way of governments. Leaders who are actively leading into a better future for the whole instead of managers who are just trying to react and optimize based on the past.